Cryptocurrencies: Reflections on their nature and legal framework
In recent years we have been witnessing a boom in the creation, use and, in general, expansion of cryptocurrencies, also called cryptocurrencies, such as Bitcoin, Ethereum, Cardano or Ripple, among many others. For this reason, I see it necessary to make a series of clarifications about this new digital currency, from a legal point of view, and without going into technical details.
What are cryptocurrencies?
It is difficult to give a precise definition, due to the constant development of cryptocurrencies, although it is usually defined as that convertible virtual currency, decentralised, mathematically based, which is protected by cryptography and which is distributed. This definition, which may be a little confusing, highlights certain characteristic features of the new virtual currencies.
- they are a convertible virtual currency, that is, the value of the cryptocurrency has an equivalent in real currency, and can be exchanged repeatedly among themselves.
- decentralised, since there is no central administrative authority, monitoring or supervision, although this point must be qualified, since the best-known cryptocurrencies, such as Bitcoin or Ethereum, are decentralised. This means that their issuance and value depend solely on the consensus protocols established and executed by the participants of the corresponding Blockchain network (the miners).
But there are other cryptocurrencies that are centralised, as their issuance and value depend on a specific entity or institution that creates and certifies them, and controls the network. One of the best-known examples is Ripple (XRP), which is a cryptocurrency expressly created by banks to be part of their usual activity (transfers). - mathematically based, as it is composed of alphanumeric sequences.
- cryptographically protected, since it incorporates cryptographic encryption with the aim of guaranteeing its ownership and ensuring the integrity of transactions, making them unmodifiable and unforgeable.
- Distributed, as it operates on a peer-to-peer network that protects the chain of operations, without a centralised control body, at least in decentralised cryptos, as we have mentioned above.
Are cryptocurrencies money?
Cryptocurrencies were born with the intention of being considered money, and even of replacing it in the future, but can they be considered money strictu sensu?
From an economic point of view it seems that, at least in terms of their concept, origin and function, they can be considered as money. Cryptocurrencies meet their three main characteristics:
- it is a store of value that allows indicating the economic capacity of the holder and can be stored for future use (although its valuation depends on a more or less volatile and relatively regulated market, which generates some uncertainty);
- it serves as a unit of account since, at least in theory, they can be used to set the price of goods and services (although for now more theoretical than real, due to the volatility and fluctuation of the value of cryptos);
- finally, it serves as a means of payment, although, as of today, it is not accepted as such by the majority of economic agents (and not all cryptocurrencies, but only a limited number of the generally accepted ones, mainly bitcoin).
A different matter is from a legal point of view… From this perspective, money is understood as that which is legally accepted and backed by a state. Therefore, the classification of cryptocurrencies as money is difficult, since they are not recognised as such by Spain, nor by the majority of countries in our environment, without prejudice to the existence of some countries or territories that are beginning to accept them, such as the state of Colorado in the United States (more information here) or El Salvador (more information here), recognising cryptocurrencies in a manner similar to a foreign currency. But it must be borne in mind that cryptocurrencies are not part of fiat money, as they are not backed by a monetary authority and, therefore, their value lies in the trust placed by users. Furthermore, the high volatility of cryptos makes it very difficult for them to fulfil their function as legal tender.
It is true that there is a tendency to consider, legally speaking, cryptocurrencies as money, arguing that they are a type of representation of the same money, electronic or digital, with an economic value and a clear purpose, payment. Even more so taking into account article 1255 of the civil code regarding the autonomy of the will of the parties. That is, if the parties so agree and recognise it as money, it will have this consideration.
But the current legal reality does not consider cryptocurrencies as money, but as an intangible movable asset. In this sense, the Judgment of 20 June 2019 defines bitcoin, and therefore other cryptocurrencies, as "an intangible asset, in the form of a unit of account defined by computer and cryptographic technology called [… which] allows it to be used as an intangible asset of consideration or exchange in any bilateral transaction in which the contracting parties accept it, but in no way is it money". It cannot be considered electronic money either, since according to article 1.2 of Law 21/2011 on electronic money, "electronic money is understood as any monetary value stored by electronic or magnetic means representing a claim on the issuer, issued on receipt of funds for the purpose of making payment transactions as defined in article 2.5 of Law 16/2009, of 13 November, on payment services, and accepted by a natural or legal person other than the issuer of electronic money." It must be understood that cryptocurrencies, although they have a value set within a market, are not legal tender and therefore do not represent a claim against the issuer, since technically they have no issuer, as they are mined.
In this regard, as Ibáñez Jiménez states, national legal regimes must, due to the decentralisation of these assets and the delocalisation of their places of issuance, establish coordination mechanisms for their legal classification and consideration as non-monetary assets of a singular nature, assimilable to movable property or incorporeal property titles.
Other digital currencies: CBDCs and Stablecoins.
The growth in the popularity of cryptocurrencies and the expectation that digital money is here to stay has led to the emergence of another type of digital currencies.
1. CBDCs (Central Bank Digital Currencies)
They are digital currencies issued by central banks, with the aim of replacing traditional banknotes and coins in the future, so they are backed – and, therefore, controlled – by said central banks. For example, we have the Chinese digital yuan or DCEP (Digital Coin Electronic Pay), projects such as Eurochain or Fedcoin.
CBDCs and cryptocurrencies are digital currencies, but we cannot consider CBDCs as cryptos, since the latter are a category of cryptoasset, of private nature, generally using DLT technology and are neither issued nor guaranteed by any central bank.
Due to their issuance characteristics, it seems that this type of digital currency will have a greater possibility of being considered as genuine money in the future, unlike what currently happens with cryptocurrencies.
2. Stablecoins.
Cryptos present a significant problem due to their high volatility, and whose value is based on the most strict trust of the users. To address this volatility, Stablecoins or stable coins have emerged. This is a variant of cryptocurrencies, whose main characteristic is that it is linked to the value of another underlying asset, which guarantees and backs its issuance and stabilises its price. In turn, this type of digital currency can be classified into three categories, depending on the underlying asset that backs them:
- Those backed by traditional money or fiat money. These stablecoins are backed by the deposit or reserve of fiat currency, for example, dollars, such as Tether and TrueCoin.
- Those backed by another cryptocurrency. Like the case of the DAI coin, although less stable, as the underlying asset (the cryptocurrency) is subject to high volatility.
- Those backed by other assets. What guarantees and backs the currency, in this case, is a good, such as precious metals or real estate. For example, G-Coin is linked to the price of gold and backed by the storage of this metal.
Consequences of the classification of cryptocurrencies
Therefore, as of today, cryptocurrencies cannot be considered as money, but rather as a digital movable asset that, having a recognisable economic value, forms part of a person's assets, whether natural or legal.
But what does it mean for it to be a digital movable asset and not money? Although it may seem trivial, the classification as a movable asset and not as money has important consequences, since it lacks direct extinguishing effects. This means that obligations will not be considered fulfilled by the delivery of cryptocurrencies, as happens with the euro, for example, unless the parties agree otherwise through the principle of autonomy of will. The payment of the obligation in this case would not be in money, but in kind, and, consequently, the person paying with cryptocurrencies cannot demand the extinction of the obligation if the creditor does not accept it.
In short, since they are not considered electronic money, for the reasons we have seen, no one is obliged to accept them, but they are digital movable assets that have a monetary value, and which in turn will serve to acquire things, although this legal act may be classified as a barter and not as a sale.
We hope that this article and these reflections on the classification of cryptocurrencies have seemed interesting to you. We have recently also shared an article about cryptocurrencies and their relationship with the IRPF which you can find here:
From JLA Notarios, notary Barcelona, we are at your disposal on the Diagonal in Barcelona for any doubts or questions. Do not hesitate to write to us at bcn@jlanotarios.com!
